VCM15060 - Investee companies: qualifying subsidiaries

ICTA/S308; ITA/S187; ITA/S191; ITA/S298 & ITA/S302; FA00/SCH15/PARA21

The rules regarding the circumstances in which a company may control other companies and still qualify under the venture capital schemes depend on whether or not the relevant shares were issued before or after 17 March 2004.

Shares issued before 17 March 2004

The company must not control any company, including dormant companies, other than a qualifying subsidiary. For shares issued before 17 March 2004 a company is a qualifying subsidiary of the parent company if it satisfies the following conditions.

a) Ownership. Not less than 75% of its issued share capital and not less than 75% of the voting power must be held by the parent company, or by another of its subsidiaries, and, in the event of a winding-up, that company must be entitled to receive not less than 75% of those assets which would be available to the equity holders (see CTM81010). For EIS and CVS, the company must continue to satisfy this condition until the end of the relevant period.

b) Control. It must not be ‘controlled' by any other person within the meaning of ICTA/S840 (see VCM20520), and no arrangements must exist by virtue of which any such person could obtain control of it.

These conditions are not to be regarded as ceasing to be satisfied by reason only of a winding- up or dissolution of the subsidiary or its parent, or of the subsidiary or its parent going into receivership, or of a disposal of the shares in the subsidiary, provided in all cases that this occurs for genuine commercial reasons and not as part of a scheme or arrangement for the avoidance of tax.

Shares issued on or after 17 March 2004

For shares issued on or after 17 March 2004, the previous 75% ownership and entitlement requirements (see above) are removed. A company can be a qualifying subsidiary if it is a 51% subsidiary of the investee company. The parent company must directly or indirectly hold more than 50% of the ordinary share capital of each subsidiary.

Property managing subsidiaries

FA04 also introduced a requirement that if the company has any subsidiary whose business consists wholly or mainly of holding land or property that subsidiary (termed a property managing subsidiary) must be a qualifying 90% subsidiary of the company (see VCM12100).